Ongoing Trade Tensions Between the U.S. and China Creating Uncertainty in the World Economy, Global Cotton Market

MEMPHIS, Tenn. – National Cotton Council economists point to a few key factors that will shape the U.S. cotton industry’s 2019 economic outlook. This past year can be characterized as a year with significant uncertainty and volatility in the global economy and the world cotton market. For this outlook, the ultimate fate of the tariffs is a significant wildcard impacting the global market. Based on the positive statements resulting from the recent negotiations, the NCC assumes that the additional tariffs being imposed by the two countries will be removed in advance of the 2019 marketing year.

In her analysis of the NCC Annual Planting Intentions survey results, Campiche said the NCC projects 2019 U.S. cotton acreage to be 14.5 million acres, 2.9 percent more than 2018. However, it is important to note that although the survey results suggest a slight increase in acreage, the increase is largely the result of weaker competition from soybeans.

Overall abandonment is projected to be lower in 2019 because most regions currently have adequate moisture levels. With abandonment assumed at approximately 10 percent for the United States, Cotton Belt harvested area totals 13.0 million acres. Using an average 2019 U.S. yield per harvested acre of 840 pounds generates a cotton crop of 22.7 million bales, with 21.9 million upland bales and 782,000 extra-long staple bales. U.S. cottonseed production is projected to increase to 7.0 million tons in 2019.

Regarding domestic mill cotton use, the NCC is projecting a modest increase of U.S. mill use to 3.25 million bales in the 2019 crop year. As the single largest user of U.S. cotton, U.S. mills continue to be critically important to the health of the cotton industry. In the face of rising textile imports from Asian suppliers, the U.S. textile industry has focused on new investment and technology adoption in order to remain competitive.

Campiche noted that export markets continue to be U.S. raw fiber’s primary outlet. World trade is projected to be higher in the 2018 marketing year, but the trade tensions and increased competition from other major exporting countries has led to a decline in the U.S. trade share. Despite the decline, the U.S. will remain the largest exporter of cotton in 2018. U.S. exports are projected to reach 15.0 million bales in the 2018 marketing year.

Prior to the implementation of tariffs, the United States was in a prime position to capitalize on the increase in Chinese cotton imports. With the imposition of the 25.0 percent tariff, China has turned to other suppliers during the 2018 marketing year, allowing Brazil, Australia, and other countries to gain market share. Vietnam is currently the top export market for the 2018 crop year, followed by China and Mexico.

China is projected to consume 40.5 million bales in 2018. For the 2018 crop year, China is expected to import 7.5 million bales, which is 1.8 million bales higher than in 2017. The gap between China’s cotton consumption and production is currently around 13 million bales. From 2015-2018, the gap was filled with reserve sales and a small level of imports. The reserve stock level now is considered to be approaching a normal or maintainable level, and China is expected to increase imports in 2019.

Assuming a resolution to the U.S.-China trade dispute, China is expected to increase mill use in 2019 to 41.4 million bales. With a further reduction in stocks for the 2018 crop year, China’s imports are expected to increase in the 2019 crop year to 11.1 million bales. Chinese stocks are projected to fall by 4.2 million bales during the 2019 marketing year to 28.2 million bales. With a resolution to the U.S.-China trade dispute, the United States is expected to export more cotton to China in the 2019 marketing year and gain back some market share.

U.S. exports are projected to increase to 17.4 million bales in the 2019 marketing year. If realized, it would represent the 2nd highest level of U.S. exports, second only to the 2005 marketing year. When combined with U.S. mill use, total offtake falls short of expected production, and ending stocks are projected at 6.1 million bales. In absolute terms, stocks would be the highest since the end of the 2008 marketing year. A stocks-to-use ratio of 29.4 percent would be the highest since the 2015 marketing year.

Campiche said world production is estimated to increase by 7.0 million bales in 2019 to 125.5 million bales, which would be the highest level since the 2011 crop. World mill use is projected to increase to 126.5 million bales in 2019. Ending stocks are projected to decline by 1.3 million bales in the 2019 marketing year to 74.2 million bales, resulting in a stocks-to-use ratio of 58.7 percent. Stocks outside of China are projected to increase to a record level in 2019.

Based on the underlying assumptions and resulting cotton balance sheet, the level of stocks outside of China in the 2018 marketing year along with higher projected production in 2019 may contribute to a more bearish tone for cotton prices in the coming year. However, the increase in world trade due to higher Chinese imports along with a resolution to the U.S.-China trade dispute could provide some price support.

As with any projections into the future, there are uncertainties and unknowns that can change the outcome. For the coming year, a key factor affecting the U.S. cotton industry is the ongoing U.S.-China trade dispute and the 25 percent tariff on U.S. cotton imported into China.

Under a scenario with tariffs remaining in place, the projected expansion in world trade and the opportunity to backfill trade into other markets would allow U.S. exports in the 2019 marketing year to increase from 2018, but not to the extent as expected in the absence of tariffs. The longer-term imposition of tariffs also would dramatically increase the likelihood of permanent losses in market share in China.